How to make an investment deal with a business angel
It's all about your business plan. Find out how to get it right.
The first and most important thing is getting your business plan right.
Business angels can be inundated with proposals, so to get your message across but keep the proposal short and simple. Don’t try to bluff your way through. Business angels are experienced in business and will see through any hyperbole. Make sure it is easy to find basic information on:
The management team
The current shareholding structure
The current financial status; and
The options available to the investor.
In particular the business plan should spell out the likely exit routes to an investor. Make it explicit as to what is on offer, what the investor will get for their money and how they will get it back.
If the business plan is well written and the investment is attractive, you may get a meeting with a business angel. In fact, you should expect to meet with a potential investor two or three times before any offer is made.
Be prepared for the due diligence process. A business angel will want to check all sorts of details about your company. This may include personal references about you and your management team, detailed financial projections about your business and the industry sector, including talking to clients and suppliers.
However, the due diligence process of a business angel may take less time than a venture capitalist. Research shows that on average venture capitalists took nearly 20 weeks on average to complete compared with under 15 weeks for business angels. The breadth and depth of this research will entirely depend upon the sophistication of the investor.
If an offer is made, you will need to determine whether this is acceptable. If you are offered £100,000 for a 50% stake in the business, this implies a total valuation of £200,000 for your business. You need to know whether this is a fair price for your business.
Look at your competitors or similar companies to try and get a better idea of how your company should be valued.
Once the outline has been agreed and is acceptable to both parties, it might be worthwhile drawing up an agreement called ‘heads of terms’. This will set out the main terms and will form the basis of any legal agreement later on, although it is not, in itself, legally binding.
It may include confirmation of the terms, the price, any conditions that need to be met before the deal is done and any confidentiality or exclusivity arrangements.
You may also find that the offer comes with a subscription agreement. This can cover a number of things but it is essentially a form of protection for the investor. A subscription agreement will typically impose a series of negative controls on the business. For example, it could impose limitations on issuing additional shares that could dilute the percentage held by a minority shareholder. Instead, business angels may want to stipulate that they have the right to buy additional shares to maintain their overall share. It may also cover the salaries of directors or regulate the role of the investor.
Depending upon the structure of the deal, you may also want to include a shareholders agreement. If you are issuing the same types of shares to the investor as held by existing shareholders, an agreement is not necessary. However, if your deal is creating different classes of shares, such as ordinary shares and preference shares, then you may find it beneficial.
How long will it take?
Finding an investor can be a lengthy process. It may take some months to find an investor and then a further three months to get the deal done. However, one of the advantages of a business angel is that there is far more flexibility than with venture capitalists. Deals can be done within a week and funds can be transferred within one month of the first meeting.
There is no hard and fast rule and much will depend upon the personalities involved. Business angel Tina Rogers explained that on occasion she has been through numerous meetings with one company over a period of several months. The business plan was reworked several times before the whole deal fell apart. A private investor may take into account more emotional factors than professional investors and a large part of the deal can be instinct, she explained.
Much will depend upon the individual investor. Hurcombe noted that he has seen deals done without any legal documentation to set out what the business angel will get.
However, all of the networks hold regular meetings providing opportunities for you to present your case to an investor. Involving yourself in the industry and making different contacts, particularly within the IT sector, is also useful.
Nick Reed, a co-founder of software startup RVC which was sold last year, explained that they went to a London based network initially when trying to find a private investor. After several attempts and reworking the business plan, Reed and his partners tried a different network and found an investor almost immediately. So, if you don’t succeed at first – keep trying.
Business angels can be inundated with proposals, so to get your message across but keep the proposal short and simple.